There may come a day when American transportation will be 100% electrified and homes will be heated with mixed hydrogen. But here and now, oil and gas pipelines are critical infrastructure.
Exhibit A is the devastation caused by the successful hack of colonial pipeline systems this month. Owned by a consortium of investors comprising Royal Dutch Shell (RDS / A) and Koch Industries
This is not the first time Colonial has been the target of concern. In 2016, a fuel spill and later an explosion forced the shutdowns. And a group of major airlines, refiners and gas station operators have called on the Federal Energy Regulatory Commission to require owners to increase capacity to ease supply bottlenecks.
It can now happen. But in the meantime, the fallout from Colonial’s demise is sure to increase the pressure on Michigan Governor Gretchen Whitmer’s attempted shutdown. Enbridge
The Line 5 case is pending in state and federal courts. And at least publicly, the two sides seem very far apart. Supporters of the shutdown allege the risk of an immediate environmental disaster. Opponents, including the Canadian federal government, accuse it of making an economic disaster on both sides of the border.
In the highly emotional and contentious world of pipeline politics, uncertainty is high. And high-profile cases can often take unexpected turns.
Ironically, the odds appear to be increasing for a possible compromise on Line 5, in large part because the Biden administration has so far refused to choose sides. In fact, the Michigan Department of the Environment, Great Lakes and Energy approved the first permits for Enbridge to build a pipeline tunnel that would largely eliminate environmental risks.
Another test case of the new administration’s policies is Enbridge’s Line 3 expansion project to replace an aging pipeline in Minnesota. This project also faces fierce opposition. But unlike line 5, it enjoys the full public support of the state government. And here, too, the Biden administration did not revoke permits previously granted by the U.S. Army Corps of Engineers, or order a presidential permit for a project the Obama administration did not.
Enbridge says work on the project is now 60% and expects all pipes “to be buried by the end of the summer.” This still leaves time for opponents to obtain a legal suspension or to convince the administration to intervene. But with the resumption of work scheduled for June after the rainy season, the company seems to have a better chance than even to bring Line 3 into service by the end of the year as planned.
As the ongoing attempts to shut down Line 5 and the Dakota Access Pipeline demonstrate, even operating pipelines with a strong safety record are not immune to litigation. In our December 16 energy commentary “Pipeline Policy: We Are Cautiously Optimistic,” we highlighted the threat of DAPL shutdown as yet another test case for the Biden administration’s pipeline policies. And here too, the government seems to favor the pragmatic approach that we were cautiously awaiting.
There is still a chance that the district court judge will order the closure of DAPL in the coming weeks. But the Biden Corps of Engineers continued to work on a new water crossing permit, with a promised completion date of March 2022. They have also refused to approve the pipeline closure now. And the US Department of Justice has said it will not intervene while the authorization process continues.
The Biden administration’s stance effectively gave the main operator LP energy transfer (ET) and its partners have two ways to keep the DAPL going: either winning a new permit from the Corps or an appeal to the U.S. Supreme Court, where they’ll likely find more sympathetic judges.
The administration is also not yet involved in the construction of the Mountain Valley pipeline, which is 90% complete. This project, however, took another blow earlier this month, when the lead developer and 48% of the owner Equitrans Midstream (ETRN) has postponed its scheduled commissioning date from late 2021 to “summer 2022”. The company also increased the planned cost from $ 200 million to $ 400 million, for a total of $ 6.2 billion.
Both estimates may well turn out to be overly optimistic. The Virginia Department of Environmental Quality and the West Virginia Department of Environmental Protection are extending their reviews. North Carolina refused to clear the Southgate segment of the project, which the company now says won’t complete until spring 2023. And the cancellation of substantial shares of the MVP investment by Equitrans’ major partners – including 30 % of owner NextEra Energy (BORN
For Equitrans, this would mean a write-off roughly equal to the current market capitalization and over 80% of equity. This is a good reason to avoid this business.
More generally, the political risk for MVP, DAPL and others sends a clear warning to investors to avoid less diversified North American oil and gas companies. These are by definition highly exposed to projects and individual clients, and therefore vulnerable to regulatory and legal setbacks.
Conversely, the handful of large, diverse mid-range companies can absorb such blows. Energy Transfer, for example, is the biggest investor in DAPL. But even before the acquisition of Activate Midstream (ENBL) this year, this asset will provide less than 5% of its EBITDA.
The energy transfer is better with the open pipeline. But a shutdown will not affect its investment grade credit rating or its generous dividend. That’s a stark contrast to the much smaller Equitrans, which would face nothing less than financial ruin from failure at MVP.
There is also the element of rarity. Oil and gas must flow. And when the transport capacity is limited for some reason, the value of the rest of the system increases.
If DAPL or Line 5 is shut down – or if Line 3 and MVP are never built – the small middleman companies involved will be hit hard. But the big, diversified players who count will absorb the blow and reap a windfall from their other assets.
The potential winners are Enbridge, which currently transports 65% of all Canadian oil exports to the United States and 20% of the gas consumed in the United States by more than 17,000 miles of oil and 24,000 miles of pipelines. In fact, it’s not that crazy to imagine Governor Whitmer’s attempt to shut down Line 5 by putting money in the company’s pocket!